Bond Supply and Excess Bond Returns

Dimitri Vayanos and Robin Greenwood

No 6694, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine empirically how the maturity structure of government debt affects bond yields and excess returns. Our analysis is based on a theoretical model of preferred habitat in which clienteles with strong preferences for specific maturities trade with arbitrageurs. Consistent with the model, we find that (i) the supply of long- relative to short-term bonds is positively related to the term spread, (ii) supply predicts positively long-term bonds' excess returns even after controlling for the term spread and the Cochrane-Piazzesi factor, (iii) the effects of supply are stronger for longer maturities, and (iv) following periods when arbitrageurs have lost money, both supply and the term spread are stronger predictors of excess returns.

Keywords: Bond prices; Limited arbitrage; Preferred habitat; Return predictability (search for similar items in EconPapers)
JEL-codes: G1 H6 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-bec and nep-fmk
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Citations: View citations in EconPapers (46)

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Related works:
Journal Article: Bond Supply and Excess Bond Returns (2014)
Working Paper: Bond supply and excess bond returns (2008)
Working Paper: Bond Supply and Excess Bond Returns (2008)
Working Paper: Bond Supply and Excess Bond Returns (2008)
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